Bill Targets Verizon Sale to Frontier

Lawmakers opposed to Verizon's attempted sale of 4.8 million rural phone lines in 14 states to Frontier Communications plan to introduce legislation to close a tax loophole that they say facilitates the transaction.

Two U.S.
Congressmen joined Jan. 7 in opposing the proposed deal between Verizon and
Frontier Communications in which Verizon would sell 4.8 million rural phone
lines in 14 states to Frontier. Reps. Paul Hodes of New
Hampshire and Alan Mollohan of West
Virginia said the $8.6 million all-stock deal would
saddle Frontier with more than $3 billion in debt while Verizon enjoys a $600
million tax windfall.

Both Hodes and Mollohan said they feared the debt load would not allow Frontier
to properly support customers or to expand or upgrade broadband service. The
International Brotherhood of Electrical Workers is also opposing the deal,
claiming the transaction would result in higher prices and poorer customer
service.

Representatives of three other states, as well as the Department of Justice and
the Federal Trade Commission, are supporting the deal.

Hodes and Mollohan said they plan to attack the deal with legislation designed
to close an obscure tax loophole known as an RMT (Reverse Morris Trust), which allows
companies such as Verizon to sell their land lines to smaller companies like
Frontier while pocketing millions in tax savings.

To qualify for an RMT, the selling company's shareholders must own a majority
of the new company. In order to do this, the acquiring company must be much
smaller than the properties to be acquired.

"I'd prefer to see that funding go to extend broadband in West
Virginia," Mollohan said at a Jan. 7 press
conference. "This [deal] is not in the best interest of our state."

In May, Verizon said it was selling off its land-line service to Frontier in
areas outside of Verizon's primary service areas of the Northeast and California.
Verizon said it wants to focus on upgrading its primary phone lines to
fiber-optic cables in order to sell television service and faster Internet
service.

In a similar deal, Verizon sold its rural phones in Vermont,
New Hampshire and Maine
to FairPoint Communications. The January 2009 deal was followed by FairPoint's
bankruptcy filing 10 months later. Hawaiian Telecom Communications acquired
Verizon's Hawaiian land lines in 2005, and filed for bankruptcy in 2008.

The Verizon-Frontier deal would add a total of 4.8 million residential and
small-business phone lines and 1 million broadband connections to Frontier. In
the proposed stock swap, Verizon will end up owning 68 percent of Frontier.